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Year in Review 2012: Verizon accelerates copper-to-fiber transition

The news: Verizon Communications (NYSE: VZ) is emphatic that it is not going to expand its FiOS FTTH footprint outside of cities that already have the service, choosing instead to focus on expanding the fiber optic service in its existing markets.

At the same time, the telco is migrating its copper network to fiber in areas that are near a current FiOS deployment.

Following Hurricane Sandy, Verizon accelerated its copper-to-fiber migration in the New York metro area due to extensive flooding that rendered its decades-old copper unusable.

Lowell McAdam, Verizon’s CEO and chairman, said during the 40th Annual Global Media and Communications Conference that the company will “take advantage of this disruption” and proceed with the fiber replacement strategy.

Verizon plans to replace copper with fiber in both New York City’s Broad Street area, which was damaged by flooding, and areas of New Jersey such as the Barrier Islands.

Upgrading these facilities from copper to fiber has a number of benefits. Since there’s unlimited bandwidth on a fiber connection, Verizon can upsell customers in those areas a higher bandwidth data connection in addition to video service.

McAdam said once the company converts a customer from copper to fiber-based FiOS, “they take either a double play or a triple play right after.”

Jefferies, a global investment firm, wrote in a research note that it agrees with McAdam, adding that the conversion could help grow future earnings.

“We believe an underappreciated opportunity for Verizon’s longer-term earnings growth is the potential to accelerate copper plant retirement and convert customers to FiOS,” Jefferies wrote. “Given the extensive overlap–16.5 million homes passed by both networks at year-end 2011 within a 26 million home service area–we think there is scope for significant cost savings and upselling opportunities.”

Besides the upsell opportunities, the other benefit is the cost savings. Unlike the copper network, the fiber network is less prone to issues and requires fewer truck rolls to fix problems and maintain those lines.

Fran Shammo, Verizon’s CFO, said at an earlier conference that the company will migrate any “chronic customer” on their copper line–meaning a customer that has two truck rolls to service the copper line during a six month period–to FiOS.

“If I can take that chronic customer and move them to FiOS, I deplete the amount of operational expense to keep that customer on and they get the benefit of FiOS Digital Voice, which is clearer, and put their DSL service onto a FiOS Internet where they realize the FiOS speeds,” he said during the Bank of America/Merrill Lynch 2012 Media, Communications and Entertainment conference.

The implications of this transition will have a broad effect on the overall competitive landscape. Jefferies wrote that “we expect the reliability of FiOS demonstrated during Sandy to be a major selling point for regulatory relief of legacy TDM rules.”

As it moves forward with its copper-to-fiber conversion process, Verizon has gotten relief from its Carrier of Last Resort (COLR) obligations, the legal requirement that every American household should have access to phone service.

Why it matters: The wholesale change-out of any legacy ILEC network from copper to fiber, while a process that will arguably take decades, is a major step in a new direction, steering away from infrastructure that was primarily designed for just one purpose: telephone service.

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